May 21 (Reuters) - Target Corp reported a 16 percent drop in first-quarter profit but showed some signs of progress in its efforts to rebuild customer confidence in the wake of a massive theft of payment card data and a botched expansion into Canada.

Target, which has fired both its chief executive and the head of its Canadian operation as it tries to regain its footing, reported a 0.3 percent drop in U.S. same-store sales on Wednesday. Analysts had expected a fall of 1.1 percent.

Target shares were flat at midday, reflecting lingering concerns about the company’s prospects as it resorts to discounts to win back customers and faces the daunting task of getting its business in Canada on track.

“It could have been worse is the general refrain...”, said David Strasser, an analyst at Janney Capital Markets. “...It was not the disaster that was feared.”

Target said traffic was “dramatically better” in the first quarter compared with late fourth-quarter trends.

Even so, U.S. store traffic fell more than 2 percent in the quarter and total sales rose just 2.1 percent to $17.05 billion, only slightly better than analysts had expected.

Brian Yarbrough, an analyst at investment firm Edward Jones, said he expected discounting - which hurt gross margins by more than a percentage point in the quarter - to continue until year-end when he expects traffic to start growing again.

Traffic improved in February and March despite the harsh weather that other retailers have blamed for weak sales, interim Chief Executive John Mulligan said on a call with reporters.

Mulligan, the company’s chief financial officer, replaced Gregg Steinhafel, who was ousted earlier in May after a data breach during the holiday shopping season resulted in the theft of at least 40 million payment card numbers.

Steinhafel had also overseen Target’s bungled push into Canada, where the company lost almost $1 billion last year after opening 124 stores in an unprecedented expansion that caused supply chain and other operational problems.

Target fired the head of its Canada operations, Tony Fisher, on Tuesday and replaced him with company veteran Mark Schindele.

“We are not where we need to be (in Canada),” Mulligan said.

The company lowered its adjusted full-year profit forecast to $3.60-$3.90 per share from $3.85-$4.15 to account for increased discounting and investments in e-commerce.

Analysts on average were expecting earnings of $3.98 per share, according to Thomson Reuters I/B/E/S.

Target’s net income fell 16 percent to $418 million in the quarter ended May 3 even after benefiting from a year-earlier comparison that included a huge debt retirement charge related to the sale of the company’s credit card operations.

Excluding items, the company earned 70 cents per share, missing the average estimate by 1 cent.

Target’s shares were up 0.4 percent at $56.62 at midday. (Editing by Ted Kerr)